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September 14, 1998

A Thousand Points Of Service

IT is helping retailers offer better shopping experiences both online and in the store

By Clinton Wilder

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RETAIL & DISTRIBUTION

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With data from Hoovers Online

Customer service is hardly a new concept in the retail and distribution industry--it was a competitive differentiator decades before IT even existed. But pioneering retailers and distributors have spent the last 12 months focusing IT on their customers as never before.

InformationWeek 500 companies in the retail and distribution industry are harnessing Internet technologies, mobile devices, upgraded point-of-sale terminals, data warehouses, and other IT innovations to give customers more buying options, better merchandise selections, faster home deliveries, and better shopping experiences. In today's retail sector, that's simply a matter of survival.

"For the past 10 years, the industry has focused technology mainly on reducing expenses to improve the productivity of inventory assets and store assets," says Joseph Smialowski, senior VP and CIO at Sears, Roebuck & Co. "But reducing selling, general, and administrative expenses has reached the point of diminishing returns. The United States now has too many stores going after a fixed number of customers. The future lies in how well you provide service to them."

"Customer intimacy" was chosen as the No. 1 business priority of retail-industry IT executives for the first time in the annual Computer Sciences Corp./RIS News survey released at the Retail Systems '98 trade show in June. In all, 54% of the 300 retail IT executives surveyed cited customer intimacy as their top business mission, up from 43% in 1997. It displaced the perennial No. 1 issue of raising efficiency and lowering costs. Cost efficiency was the top priority of 39%, down from 46% last year. "That's an incredible shift," says Steve Biciocchi, the partner leading CSC's retail practice.

Savvy retailers understand that customer service should be the goal of myriad aspects of their business, not just the problem of the returns and complaints desk in the store. Attracting and especially retaining customers starts with having products that customers want, when they want them.

"From a customer-service point of view, the most important thing is inventory management," says Bill Blumberg, a partner with Deloitte Consulting's consumer business practice. "Maintaining an in-stock position keeps the customer happy, and it keeps you happy because you didn't lose the sale."

Innovation In Stocking
The Home Depot Inc.'s use of IT to report merchandise outages right from the store floor helped the company win the retail innovation award at the Retail Systems '98 show. By the end of this month, Home Depot plans to have its mobile ordering system deployed in all 700 of its stores.

The homegrown application lets store employees order new stock directly from a Telxon Corp. graphical radio-frequency pen-input device. The device transmits the order to an in-store Unix processor that houses inventory data. If stocks are running low, the processor automatically transmits a new order to the supplier via electronic data interchange.

"At any given time, the computer only knows what's in the inventory database, not what's on the shelf," says Home Depot senior VP and CIO Ron Griffin. "Now, our employees can look at inventory right from the customer's perspective."

Another InformationWeek 500 retailer, Service Merchandise Co., is deploying an average of eight radio-frequency devices in 350 stores; these devices will let customers essentially check out merchandise in the store aisle-without waiting in line. An employee inputs the data on the purchased items, and the device prints a bar code label that the customer brings to the checkout register for payment.

Innovations like that one bring IT closer to the customer-but the Internet puts technology right into customers' hands. The past year has seen large retailers and distributors look beyond the Web as simply a new sales channel. Looking strictly at sales over the Web, the biggest retail successes are Web-only

newcomers such as Amazon.com and CDnow, not Sears, Kmart, or Wal-Mart. It's true that traditional retailers such as J.C. Penney are beefing up their Web sites and seeing sales grow, but the most innovative uses of Internet technology in the retail world are for improving customer service.

Kmart and Service Merchandise are placing intranet-based kiosks with touchscreen Web browsers in their stores. Customers at selected Kmart locations can use the kiosks to purchase large appliances from the stockroom. Since Kmart doesn't have room to display such items in the store, the intranet application lets the retailer expand its available inventory.

This fall, Service Merchandise plans to open several smaller, specialized stores called ServiceSelect, but shoppers in those stores can order items from any other Service Merchandise location from a Web kiosk in the smaller store. Similarly, J.C. Penney lets customers place online catalog orders in its stores if the desired item is out of stock. "We really want to make our point-of-sale terminal a point-of-service terminal," says Dave Evans, senior VP and CIO at J.C. Penney.

Both J.C. Penney and Service Merchandise achieve that goal by simply linking their back-end fulfillment systems to an in-store Web browser, the same way they link to their Web sites. The goal is ease for the customer, whether on the Web, via catalog, or in the store. "You can't dictate channels to the customers," says Sears' Smialowski. "You have to provide various options and let them choose."

In-Store Increase From The Net
Sears recently formed a new division called Sears Direct to handle its Internet activities under the leadership of Jane Thompson, formerly president of the company's home services business. Sears now sells only its Craftsman tools on the Web (and has a link to 1-800-Flowers) but will shortly start selling spare parts for brand-name appliances. By early next year, Sears plans to offer appliance schematic drawings to help do-it-yourselfers make home repairs. "Retail companies are finding that when their customers are on the Net, their in-store sales increase," notes Smialowski.

Service Merchandise agrees. The Nashville, Tenn., retailer is transforming itself from a company that features general merchandise catalog showrooms to one that focuses solely on home products and jewelry; it views the Web as a key tool. This fall, the company's Web site will let customers check availability of stock at the nearest retail location and reserve the product online.

"For every dollar spent on Internet purchases, at least as many are spent in stores after preshopping on the Net," says Service Merchandise senior VP and CIO Ken Brame. "We want to facilitate that and make it as easy as possible."

Sears has also applied IT to the home-repair part of customer service in an all-out effort to eliminate the "we'll be there sometime between 10 and 4" routine customers loathe. Sears has equipped 12,000 field technicians with rugged Wintel-based mobile devices from Itronix which alert them to service-call schedule changes in real time. Sears optimizes service-call schedules with the help of an Environmental Systems Research Institute mapping application running on an IBM SP2 parallel processor. This effort has other payoffs as well. "Improved customer service is a soft benefit, but there are also hard benefits-completing more calls per day while driving fewer miles," says Smialowski.

The retail and distribution industry continues to be a leader in data warehousing, with giants such as Sears and Wal-Mart mining multiterabyte warehouses on NCR Teradata systems. Such data particularly improves what is known as assortment planning: offering the right products at different locations or in different regions. Sears, for example, carries different lawn mowers in the Los Angeles area because of that region's stricter gas emissions and lawn clippings disposal regulations.

Warehouses Stocked With Data

Vendors of vertical applications for retail have also tuned in to data warehousing. Intrepid Systems (acquired this year by PeopleSoft) and Retek Information Systems Inc. both offer data warehouses based on DSS tools from MicroStrategy Inc. "Retailers have had the data for years, but the tools to capture and use it have improved significantly so there's a lot more focus on it," says Deloitte's Blumberg.

But some retail IT executives are wary of "data obsession," at least at the store level. Home Depot uses data mining techniques for merchandise analysts in its centralized buying offices but not in its individually managed stores. "We don't want the rank-and-file doing data mining. It only dilutes their focus," Griffin says. "There's a danger of too much information, and you end up chasing 2% improvements where you could get 30% by executing on the important things. Information, in the absence of execution, is just overhead."

Collaboration Beyond EDI
The retail industry has long used EDI to communicate with suppliers, but Internet technology is bringing supply-chain collaboration to a new level. J.C. Penney's extranet, SupplierNet, lets 3,000 registered merchandise vendors access the retailer's mainframe-based accounts payable system to find out the payment status on their shipments. Vendors also see sales results for their products, but not for their competitors' goods.

"We're adding a little grease into the supply chain," says Evans. "We still have the big-batch EDI systems for invoices and the like, but the Net allows you to make other information easy to exchange with vendors because they don't need any proprietary J.C. Penney software to do it. The more perfect information that's available, the better it is for everyone."

Service Merchandise has also greased its supply chain, reducing inventory levels and moving from monthly to weekly supplier deliveries. Its EDI purchase orders and invoices now generate advance shipping notices, so the company knows exactly where items are headed when they arrive at the distribution center.

"By the time the merchandise hits, we've already done the allocation to stores," says CIO Brame. The company also has an Internet-based transportation optimization system that selects regional trucking companies on the basis of most effi-cient routing.

While such innovations are improving retail supply chains today, the future of retail supply-chain optimization is known as Collaborative Planning, Forecasting and Replenishment. CPFR calls for unprecedented large-scale collaboration between suppliers and retailers. CPFR has moved ahead in the last 12 months with several pilots' getting under way, primarily in grocery retailing, and the issuing of CPFR guidelines by the Voluntary Interindustry Commerce Standards association.

But for the largest retailers, CPFR remains a future vision, not a present reality. "With EDI and the Internet, sharing of the necessary data is easy from a technology standpoint," says Deloitte's Blumberg. "The hard part is building the partnership and trust."

IT alone can't make that happen, but it's prepared to roll when supply-chain partners are ready.

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